A Historian on the Lessons of the Depression

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These material and structural differences between the Depression era and the crisis we face today are significant. But the most important and consequential differences lie in the realms of ideas and attitudes, especially regarding the role of government. Consider what might be called "the tale of two Secretaries." Treasury Secretary Hank Paulson (along with Federal Reserve Chairman Ben Bernanke, who presides over an immeasurably more potent Federal Reserve system than existed in 1929) has acted with vigor to bring the full powers of the Federal Government to bear in the current crisis. In dramatic contrast, when Herbert Hoover asked his Secretary of the Treasury, Andrew Mellon, for advice on how to cope with the financial implosion of 1929, Mellon replied, "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system." Echoes of that old-time sentiment can still be heard today, but they are mere vestiges of the stifling tyranny of laissez-faire thinking that paralyzed so many governments in an earlier era.

Franklin Roosevelt wondered frequently during the 1932 electoral campaign at what he saw as the surprising docility of the American people in the face of the Depression. "Repeatedly he spoke of this," his aide Rexford Tugwell recalled, "saying that it was enormously puzzling to him that the ordeal of the past three years had been endured so peaceably." That odd passivity has intrigued historians, who have noted that it forced Roosevelt to simultaneously invent the tools to combat the Depression and establish their very legitimacy in the eyes of the people.

Today the debate about the legitimacy of government's role is largely ended. What argument remains focuses on the efficacy and fairness of various policy choices, not on the idea of intervention itself. Public opinion is far from unanimous about what should be done, but it is virtually unanimous that something must be done. That represents a seismic shift in popular attitudes.

It is now inarguably clear that what we know as the New Deal was important not for ending the Depression--it didn't--but for putting in place a host of creations like the FDIC, Social Security, unemployment insurance, the Securities and Exchange Commission and a vastly strengthened Federal Reserve system. Complemented by the multilateral bodies that were spawned at the end of World War II, these institutions formed a latticework of stability and security on which the nation's and the world's economies grew so robustly that a new word, globalization, was coined to describe the results.

Recent events have demonstrated, though, that rampant globalization has outpaced intellectual and political innovation. Exotic investment instruments like credit-default swaps and collateralized debt obligations have eluded meaningful monitoring, baffled regulators and investors alike and raised hob with markets worldwide. What is now manifestly needed is a round of creative institutional invention like what the New Deal gave us. Then history will have repeated itself neither as tragedy nor as farce but as common sense and consequential reform.

Kennedy is a professor of history at Stanford University and author of the Pulitzer Prize-winning Freedom from Fear: The American People in Depression and War, 1929-1945